The International Monetary Fund (IMF) lauded the decision by the Maldives to raise goods and services taxes (GST), saying the action had brought sizeable revenue windfalls in 2023, while commending the nation for discontinuing the exceptional use of the Maldives Monetary Authority (MMA) advances. The Executive Board of the IMF recently concluded an Article IV consultation with the Maldives.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A team visits the country, collects information, and holds discussions with officials on a country’s economic developments and policies. The team then prepares a report, which forms the basis for discussion by the IMF’s Executive Board.

According to the IMF, despite global challenges, the Maldives’ recovery from the COVID‑19 pandemic has shown resilience with the economy growing by 13.9 percent in 2022 — tourism contributed to about one third of growth. Inflation has been contained at 1.9 percent year-on-year in December 2023, helped by falling food and energy prices and price subsidies, the agency noted in a statement.

However, the overall fiscal deficit is estimated to reach 13.4 percent of GDP in 2023, with public debt rising further to 118.7 percent of GDP in 2023 the IMF report warned. Reflecting surging capital goods imports, high import costs of food and fuel, and strong import demands associated with tourism activity, the current account deficit had sharply widened to 22.8 percent of GDP in 2023, the United Nations’ financial agency said, adding that gross international reserves declined to US$589 million at end-2023, covering about 1.4 months of prospective imports.

Real GDP growth is estimated to average 4.4 percent in 2023, before gradually rising to 5.2 percent in 2024, according to the IMF; which also projected that the Velana international airport terminal expansion and associated increase in hotel accommodation capacities would further boost growth potential.

Amid elevated commodity prices coupled with continued strong import demands, the current account deficit is projected to remain large albeit gradually narrow over the medium term, the agency observed, even as it warned that, without significant policy changes, the Maldives remains at high risk of external and overall debt distress.

Uncertainty surrounding the outlook is high and risks are tilted to the downside including from delayed fiscal consolidation and weaker growth in key sources markets for tourism, the IMF said in its statement, going on to outline that the Maldives is highly vulnerable to climate change risks, with potentially severe economic costs due to floods and rising sea level.

The IMF’s Executive Directors welcomed the Maldives’ strong post-pandemic recovery, but underlined that large fiscal and external vulnerabilities persist and risks are titled to the downside. Against this background, Directors stressed the need for immediate policy adjustments to safeguard macroeconomic and financial stability, restore debt sustainability, and support sustained strong and inclusive growth.

Directors welcomed the Maldives’ authorities’ commitment to advance their homegrown fiscal reforms, underscoring that strong and credible fiscal consolidation is urgently needed to restore debt sustainability and help rebuild international reserves. This should entail a combination of holistic expenditure rationalisation and further domestic revenue mobilisation, the agency said, adding that strengthening financial and debt management is also critical to enhancing the effectiveness of fiscal policy.

IMF’s Directors agreed that better fiscal and monetary policy coordination should facilitate necessary monetary policy actions to safeguard the exchange rate peg — the Directors commended the nation’s decisive action to discontinue the exceptional use of MMA advances, while also underscoring that it should be complemented by more active liquidity management over time. Directors also encouraged an acceleration of foreign exchange market reforms to enhance the credibility of the peg.

Directors urged the authorities to adopt macro-prudential policies to help mitigate systemic risks stemming from the sovereign-bank nexus. They encouraged the authorities to swiftly introduce a macro-prudential institutional framework, and instruments, and further develop the systemic risk monitoring capacity. Directors considered that the financial safety net needs to be strengthened, along with enhancing financial sector oversight and crisis management. They emphasised that addressing gaps in the legal framework and implementing the anti-money laundering and combating the financing of terrorism (AML/CFT) framework remain a priority.

Directors encouraged the authorities to accelerate reform efforts to support inclusive and sustainable development. They emphasised that improving the business climate, strengthening governance and tackling corruption, and enhancing skill developments, are crucial to boost growth potential and competitiveness.

Given the Maldives’s high vulnerability to climate change, Directors underscored that reforms to integrate climate considerations into the public financial and investment management processes and frameworks will help support climate adaptation and mitigation efforts and mobilise additional climate finance.